CHAPTER 1 notes - The Nature and Method of Economics...

The Nature and Method of Economics CHAPTER ONE I. Definition of Economics A. The social science concerned with the efficient use of limited or scarce resources to achieve maximum satisfaction of human materials wants. B. Human wants are unlimited, but the means to satisfy the wants are limited. II. The Economic Perspective : viewpoint that individuals make rational decisions by comparing the marginal benefits and costs associated with their actions. A. Scarcity and choice. 1. Resources can only be used for one purpose at a time. 2. Scarcity requires that choices be made. 3. The cost of any good, service, or activity is the value of what must be given up to obtain it ( opportunity cost ). B. Consider This … Free for All ? 1. Products provided for “free” to an individual are not free for society because of the required use of scarce resources to produce them. 2. Companies provide “free” goods as a marketing strategy to promote brand awareness. 3. Products that are promoted as “free” to the individual may actually be bundled with another good for which the consumer must pay. Because a purchase is required to obtain them, these products are not really free to the buyer. C. Purposeful Behavior. 1. Rational self-interest entails making decisions to achieve maximum utility 2. Individuals look for and pursue opportunities to increase their utility : the pleasure, happiness, or satisfaction obtained from a good/service. 3. They way the costs and benefits and therefore it is rational/purposeful. 4. Purposeful behavior means that people make decisions with some desired outcome in mind. 5. Rational self-interest is not the same as selfishness bc people often have to sacrifice to other people’s wants to obtain satisifaction. D. Marginalism: benefits and costs. 1. Most decisions concern a change in current conditions; therefore the economic perspective is largely focused on marginal analysis : comparisons of marginal benefits and costs, usually for decisions making. 2. ‘Marginal,’ to economists, means additional or extra or a change in (status quo). 3. Whether the decision is personal or one made by business or government, the principle is the same. 4. The marginal cost of an action should not exceed its marginal benefits. 5. Opportunity costs are present whenever a decision is made. III. Theories, Principles, and Models A. Economists use the scientific method to establish theories, laws, and principles. 1. The scientific method consists of a. The observation of facts (real data). b. The formulations of explanations of cause and effect relationships (hypotheses) based upon the facts. c. The testing of the hypotheses and comparison of the predicted outcome and actual outcomes d. The acceptance, rejection, or modification of the hypotheses. e.

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